How an Increase in American Natural Gas Production Could Change the Global Market

Shale gas deposits and new trade agreements could radically alter the current market.

Mar 31, 2014 at 12:34PM

The U.S. is sitting on a gold mine. No, not literally, but while shale gas continues to hog the headlines, the U.S. is poised to radically alter the global gas market merely by following its best interests. 

It is true that the U.S. has historically imported a large amount of its energy requirements, yet recent technological advancements now allow one of the world's greatest energy importers to turn the tables and export its newfound wealth.

That wealth lies in much debated shale gas, although discussion continues. 

An opportunity to boom

2013 saw the U.S. moving past Russia as the largest natural gas producer in the world, yet this title pales in comparison to energy development plans in the near future. Already producing 93% of its natural gas demand domestically, the U.S. government has approved seven new liquefied natural gas (LNG) development projects and is in the process of approving other development projects estimated to begin gas extraction by 2017. The seven projects that have been approved the U.S. energy department have a combined capacity to export nearly 10 billion cubic feet (bcf) of gas per day, a number that exceeds the annual energy requirements of Germany, Europe's most successful economy.

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At the same time, the government is pushing through legislation allowing new trade opportunities for U.S. natural gas firms. This new legislation seems bizarre until investors realize that companies are not permitted by current regulations to export gas to countries that do not have a free trade agreement with the U.S. 

Looking to address that, the U.S. government has already approved new natural gas exports to Lithuania and other allies, with the intent of expanding existing agreements further. Unfortunately, figures have not yet been released as to how much higher agreements may go, but this is expected to change as development projects move closer to completion.

Consequences of a U.S. boom

Although it may seem like the perfect time to invest into natural gas companies like Dow Chemical Co. that are poised to expand, a boom does have drawbacks. First, natural gas facilities are still in short supply, requiring a large investment to create the necessary infrastructure needed to support logistical demands. Then again, given the potential payoff, this is but a necessary up-front cost needed to allow payoffs later. 

Also, a boom in natural gas exports might be perfect for the U.S., but it will also have huge consequences for the global market. As things stand, the U.S. enjoys a massive benefit over other natural gas markets: U.S. oil and gas prices are not tied to one another the same way they are in both Europe and Asia (the next largest gas markets).

This Eurasia pricing decision has energy costs sitting consistently at levels three to four times that of the U.S. A boom could then do one of two things: either oil and gas prices could collapse as cheap U.S. natural gas floods the market, or pricing policies could change and lead Eurasian markets to adopt the U.S. model of pricing (that is, with separate gas and oil prices).

Winners and losers

There are political considerations to expanding U.S. natural gas. The greatest of these involves the former leader in natural gas production: Russia. It stands to lose the most as current European clients may look west for cheaper gas supplies. 

And they will likely find them. Current technology already has natural gas prices at levels equal to oil-based counterparts and will only get cheaper as extraction becomes easier and more price efficient. What this may mean is less market stability in the short term, but a sustained general lowering of energy costs in the near future as well.

3 stock picks to ride America's energy bonanza

Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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